Trade Wars – What is the market’s current direction?
As volatility get us all a little unhinged, we want to offer some insight that might ease your initial fears. Always remember the value of a good plan and don’t let the headlines (as scary as they can be) drive your decisions. Emotions are irrational but fundamentals are sound.
My good friend and internal CFA partner, Greg, provides some very interesting insights that should give your emotions some pause.
For many months, and in some cases years, stock market bears have emphasized the rich valuation of markets. We tended to view valuations as more neutral during much of that period. Certainly not cheap, but not unreasonable considering low inflation, low interest rates and steady growth.
Over the past two months, investors have been reminded of what stock market corrections feel like. Even small ones don’t feel good. However, a silver lining has developed in terms of valuation. As we see in our chart today, the P/E ratio has come down to about 16, which is in line with long-term averages.
Importantly, the drop in valuation is not only because of the drop in prices, but also the increase in earnings projections due to tax cuts and worldwide economic growth. But could the potential trade wars stall that growth? We will be watching the upcoming corporate earnings announcements to hear their views.
While valuation is rarely a good timing tool, we take some level of comfort in knowing that a key bear case is no longer nearly as relevant as just a couple of months ago.
If you have any questions, please feel free to give us a call. Let’s Connect